Question

Which one of the following best matches the primary goal of financial management? Increasing the dollar amount of each sale Increasing traffic flow within the firm's stores Transforming fixed costs into variable costs Increasing the firm's liquidity Increasing the market value of firm

Answer 1

The primary goal of financial management is to increase the firm's market value, aiming to maximize shareholder wealth. Secondary goals like increasing sales and altering cost structures support this primary objective, and firms can also grow by reinvesting profits.

Step-by-step explanation:

The primary goal of financial management is to increase the market value of the firm. This is achieved through various strategies including making informed investment decisions, managing the company's capital structure effectively, and carefully examining the tradeoffs between risk and return. Enhancing the market value corresponds with the maximization of shareholder wealth, which is considered the overarching aim of financial managers. Other actions like increasing sales, managing traffic flow, altering cost structures, and maintaining liquidity are supportive of this goal, but they are considered secondary or instrumental to the overarching objective of value maximization.

Financial management is crucial as it involves decisions about how and where to allocate the firm's capital. Insights into profit maximization come from understanding the cost structure of the company, which includes both fixed and variable costs, as well as the analysis of sales and revenue patterns. Additionally, firms can pursue growth by reinvesting profits, a method that enables them to expand operations, improve technology, and hire more labor.

Answer 2

Increasing the market value of firm.

Step-by-step explanation:

Primary goal is to maximize the long term wealth of the company´s shareholders by increasing the market value (price) of their shares.

Management can encourage an increase on share price by earning an attractive return on an acceptable level of risk.

There are three equivalent goals of financial management:

-maximize shareholder wealth

-maximize share price

-maximize firm value

-or: to maximize the current value per share of existing stock (note: for the stock price to be an accurate measure of the financial manager´s performance, we need capital markets to do their pricing job correctly -we need capital markets to be efficient. In an efficient capital market, all available information is incorporated into stock prices, and thus what the financial manager knows, the shareholders know it, too).